Many investors may never have heard the term ESG, but in terms of what it stands for, it’s exactly what an overwhelming number of them are looking for from their portfolios. It’s more than just the latest FinTech trend – in fact, it’s been around for decades, under a variety of names from Socially Responsible Investing in the 90s to a host of others, but behind all the jargon and all the acronyms is a simple hunger on the part of investors: for their money to be used to make an impact that means more than simply a good yield.
Exactly what impact represents to an individual client? That’s the tricky part, as discussed by industry experts at the Morningstar Investment Conference 2021 held this week in Chicago.
“This is often referred to as double bottom line investing,” said Kristina Van Liew, managing director at Graysone Consulting, an early pioneer in the ESG space. “Instead of just optimizing on the trade positions, impact investors and their advisors need to think in all three dimensions: risk, return, and the potential for the positive impact of those investments. All three factors need to be taken into consideration and then optimized. All of it has to be defined by the client’s objectives. Everyone’s definition of impact is so different, so no two programs tend to be alike.”
This notion of impact, as such, is nothing new for investors; what makes the ESG space so different – and why it’s catching fire right now – is the unprecedented amount of data analytics available to fuel it.
“It’s a data race,” said Cheryl Gustitus, Executive Vice President at Sustainalytics. “It’s continued expansion, not just of securities coverage, but in terms of the data points that underlie the mechanisms for advisors to be able to report in a deep way to clients. In all, whatever level it’s at, the appetite for data has just not only exploded, it’s an insatiable appetite. It continues to push forward based on the issues.”
Now more than ever, investors are hungry for more information. People want to know what they own, why they own it, and how those holdings help or hurt the performance of their investments. Add in a desire for real tangibles in terms of defining impact, and it’s a much more complex question for advisors than a simple risk-return proposition.
“Investors do have realistic expectations, but only when they’re properly guided,” Van Liew said. “Client discovery takes on much greater relevance with these mandates. So does the use of strong investment discipline and program construction. If a client wants to lean into issues such as the environment, or diversity inclusion, it’s incumbent upon us as their consultants to really listen closely, but then think holistically about how to build a strong performing, diversified portfolio that still builds on all these things.
“You have to work harder. Advisors have to be willing to use a multidimensional approach to building targeted portfolios. But if successful, they’re going to find the skillset’s in high demand.”
